Income Inequality and Poverty 5121
10. A U.S. family earning $80,000 would be in the top 20 percent of income distribution in 2011.
a. True
b. False
11. An income distribution may not give an accurate picture of the standard of living for the poor
because it does not include in-kind transfers.
a. True
b. False
12. Since 1970 the United States’ income distribution has become more equal.
a. True
b. False
5122 Income Inequality and Poverty
13. In 2011 the top 20% of income earners accounted for over 80% of all income received by United
States’ families.
a. True
b. False
14. In 2011 the top 5 percent of income earners accounted for over 50% of all income received by
United States’ families.
a. True
b. False
15. In the United States from 1935 to 2011 the share of total income earned by the bottom fifth of
income earners rose and then fell.
a. True
b. False
Income Inequality and Poverty 5123
16. Despite continued growth in average income since the early 1970s, the poverty rate has not
declined below the level reached in 1973.
a. True
b. False
17. Even though the average income in the United States has continued to grow, the poverty rate has
increased to over 20% since the early 1970s.
a. True
b. False
18. The measured poverty rate may not reflect the true extent of economic deprivation because it
does not include some forms of government assistance.
a. True
b. False
5124 Income Inequality and Poverty
19. The poverty line is set by the government so that 10 percent of all families fall below that line and
are thereby classified as “poor.”
a. True
b. False
20. The poverty line is an absolute standard and is based on the cost of providing an adequate diet.
a. True
b. False
21. The poverty line is based on the percentage of people who cannot afford an adequate diet.
a. True
b. False
Income Inequality and Poverty 5125
22. The poverty rate is the percentage of the population whose family income falls below the poverty
line.
a. True
b. False
23. The poverty rate is an absolute level of income set by the federal government for each family size.
A family with income below this rate is deemed to be in poverty.
a. True
b. False
24. The elderly represent the largest demographic group in poverty.
a. True
b. False
5126 Income Inequality and Poverty
25. About half of black and Hispanic children in female–headed households live in poverty.
a. True
b. False
26. Standard measurements of the degree of income inequality take both money income and in-kind
transfers into account.
a. True
b. False
27. The economic life cycle describes how young people usually have higher savings rates than
middle-aged people.
a. True
b. False
Income Inequality and Poverty 5127
28. Many economists believe that a family bases its spending decisions on its permanent, or average,
income rather than on transitory income.
a. True
b. False
29. Most economists believe that a family bases its spending decisions on its transitory income.
a. True
b. False
30. About four out of five millionaires in the United States earned their money rather than inherited it.
a. True
b. False
5128 Income Inequality and Poverty
31. Fewer than three percent of families are poor for eight or more years.
a. True
b. False
32. There is very little economic mobility in the United States, which means that once a family is poor,
it is very likely to remain poor for at least a decade.
a. True
b. False
33. According to a study by Michael Cox and Richard Alm, consumption per person in the richest
20% of households was only 2.1 times consumption per person in the poorest 20% of households.
a. True
b. False
Income Inequality and Poverty 5129
34. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of
everyone in society.
a. True
b. False
35. The utilitarian justification for redistributing income is based on the assumption of diminishing
marginal utility.
a. True
b. False
36. John Rawls, who developed the way of thinking called liberalism, argued that government policies
should be aimed at maximizing the sum of utility of everyone in society.
a. True
b. False
5130 Income Inequality and Poverty
37. If a government could successfully achieve the maximin criterion, each member of society would
have an equal income.
a. True
b. False
38. A follower of liberalism would not support a redistribution of income but rather would focus on
equalizing opportunities.
a. True
b. False
39. The maximin criterion is the idea that the government should aim to maximize the well-being of
the worst-off person in society.
a. True
b. False
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40. According to libertarians, the government should redistribute income from rich individuals to poor
individuals to achieve a more equal distribution of income.
a. True
b. False
41. Libertarians believe that the government should enforce individual rights to ensure that all people
have the same opportunities to use their talents to achieve success.
a. True
b. False
42. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal
outcomes.
a. True
b. False
5132 Income Inequality and Poverty
43. Critics argue that a disadvantage of minimum-wage laws is that they do not effectively target the
working poor because many minimum-wage workers are the teenage children of middle-income
families.
a. True
b. False
44. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax
program.
a. True
b. False
45. The Supplemental Security Income (SSI) program focuses on the poor who are sick or disabled.
a. True
b. False
Income Inequality and Poverty 5133
46. One existing government program that works much like a negative income tax is the Earned
Income Tax Credit.
a. True
b. False
47. One existing government program that works much like a negative income tax is Medicaid.
a. True
b. False
48. An advantage of a negative income tax is that it does not encourage the breakup of families
because the only criterion for assistance is family income.
a. True
b. False
5134 Income Inequality and Poverty
49. Critics argue that a disadvantage of the Earned Income Tax Credit is that it does not effectively
target the working poor because many recipients are the teenage children of middle-income
families.
a. True
b. False
50. A disadvantage of the Earned Income Tax Credit (EITC) program is that it does not help alleviate
poverty due to unemployment, sickness, or other inability to work.
a. True
b. False
51. Explain the relationship between labor earnings and the distribution of income.
Income Inequality and Poverty 5135
52. What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.
53. Given the table shown, which country has a more equal income distribution? Explain your answer.
Country
Bottom Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Top Fifth
Country A
9.0%
13.5%
17.5%
22.9%
37.1%
Country B
4.8%
10.5%
16.0%
23.5%
45.2%
5136 Income Inequality and Poverty
54. Explain what information is contained in the poverty rate statistic. Are there problems in using an
absolute scale to measure poverty? If so, explain them.
55. Compare and contrast the “life cycle” hypothesis and the “permanent income” hypothesis. What
are their respective implications for inequality in the income distribution?
Income Inequality and Poverty 5137
56. Explain the concept of diminishing marginal utility, and describe the role that it plays in the
utilitarian argument for the redistribution of income.
57. Explain how a “leaky bucket” can be used to illustrate the utilitarian argument that governments
should not attempt to completely equalize individual incomes.
5138 Income Inequality and Poverty
58. Briefly describe the three prominent schools of thought in political philosophy. Identify one of the
most well–known philosophers in each school.
Income Inequality and Poverty 5139
59. The table below reflects the levels of total utility received from income for each of four
members of a society.
Income
Peter
Mary
Jane
$1
15
20
16
$2
29
38
30
$4
54
68
52
$6
75
90
66
$7
84
98
70
Assume that the society has the following income distribution:
Peter $3
Paul $7
a. Mary $5
Jane $3
Is it possible for the government to increase total aggregate utility by redistributing income
among members of society? Explain your answer. Assume that the government has $19 to
allocate among the four members of society.
b. (Assume that no one has any income to start with.) If the government is interested in
distributing income in a way that maximizes aggregate total utility, how should it distribute the
$19 of income?
c. Does the table above describe a situation characterized by diminishing marginal utility?
Explain your answer.
5140 Income Inequality and Poverty
60. Assume that the government proposes a negative income tax that calculates taxes owed by the
following formula, Taxes Owed = (1/3 Income) – $10,000.
Compute the tax that would be owed given each level of income.
a. $120,000
b. $90,000
c. $60,000
d. $30,000
e. $0
61. Assume that the government proposes a negative income tax that calculates taxes owed by the
formula, Taxes Owed = (a Income) – b. A family with an income of $40,000 pays $5,000 in
taxes, and a family with an income of $12,000 receives an income subsidy of $2,000.
a. What is the value for “a”?
b. What is the value for “b”?
c. What is the tax liability of a family with an income of $50,000?
d. At what level of income will a family neither pay taxes, nor receive an income subsidy?